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The Survival of Millions of Small Businesses Is Threatened

By Patrick Hill | July 9, 2020

The Survival of Millions of Small Businesses Is Threatened: Let’s Support Them!

“I can’t throw everything I worked for under the bridge. I’m sitting in my retirement.”

Dennis Dreibelbis – owner of the G Bridge Lodge, in a restaurant he purchased in 1984 investing long term to support his retirement –  6/10/20

Mr. Dreibelbis is 69 years old. In mid–March he shut down his Pennsylvania restaurant. He quickly fell behind in payments to vendors, rent, utilities, and payroll. He hopes to see a return of customers when he reopens this summer.  He received a Payroll Protection Program loan which goes mostly to pay his staff. He still has insurance, maintenance, and other unpaid bills pilling up. Dreibelbis does not want to close the business and lose his investment or be forced to sell in a weak economy.

David Deeds, a professor of entrepreneurship at the University of St. Thomas says, “Their (retirees) time horizon is short.” He estimates that revenues for most small businesses revenues will fall up to 50% and will need to be ready for reduced income for up to three years.  Dreibelbis’s situation is typical of 40% of 31 million small business owners who are age 55 or older. Prospective retirees face a major crisis keeping their business operating and running up debts while looking to retire in the near future.

Four Major Factors

Millions of small businesses are struggling to survive due to lockdowns, delayed reopening, and now reversed openings. To understand the dynamic transformation small businesses are experiencing we’ll look at four factors:

  • Pandemic Impact – Review of three of some of the hardest hit industries: restaurants, lodging, and creative services.
  • The Outlook for Small Businesses – Examine the present “Great Depression” state of small businesses and prospect of a U-shaped cycle of contraction, with an extended trough and recovery.
  • Federal Relief Programs Fall Short– Evaluate how well federal financial assistance to small businesses is working and where it is fails to meet the needs of small businesses.
  • Investment Opportunities – Present several investment alternatives to take an active role in supporting small businesses.

Pandemic Impact


There are 1 million restaurants across the U.S. with 70% of them run by small businesses owners.  The restaurant industry has been hard hit by the pandemic with a loss of $82 billion of total restaurant sales from March through May:

Small Business, The Survival of Millions of Small Businesses Is Threatened

Sources: U.S. Census, National Restaurant Association – 6/16/20

The National Restaurant Association estimates that 3%, or 30,000 of total restaurant locations have already closed permanently. As the financial squeeze of Mr. Dreibelbis typifies, many restaurants are hanging on by a financial thread with curbside pickup, delivery or outside dining at 50 % capacity.

Small Business, The Survival of Millions of Small Businesses Is Threatened

Sources: Open Table, Bloomberg – 6/17/20

Restaurants have seen an increase in business since states have reopened yet sales are falling back. A recent analysis of Open Table reservations shows a slow rise as reopening activity began across the country but was followed by an 18% fall.  This decline maybe the result of a rise in COVID-19 cases in 21 states causing prospective diners to be concerned about their safety.

Open Table predicts that 25% or 250,000 of all restaurants will permanently close which includes 175,000 small business operated locations. Other research of major concern comes from Yelp. Yelp reports for the week of June 15th that 53% of website listed restaurants have posted ‘permanently closed’ notices with highest rates of closure in Los Angeles, New York and San Francisco.


The American Hotel and Lodging Association (AHLA) estimates that 8 of 10 hotel rooms were empty in April.  AHLA forecasts a 50% or more decline in revenue for the year of 2020. Over 70% of all hotel employees have been laid off or about 1.6M employees and a loss of $2.4B per week. Oxford Economics estimates that at total of 3.9M jobs that support the hotel industry will be lost over the next two years.

Small Business, The Survival of Millions of Small Businesses Is Threatened

Source: AHLA, Oxford Economics – 6/16/20

The AHLA expects a slow recovery process as travellers become more confident in staying at a hotels. There are 33,000 small businesses operating hotels in the U.S. with projected occupancy rate of 20% or lower.  At a 35% occupancy rate these small businesses are at risk of closing their locations permanently.  Thus, most of these small business run locations are in danger of closing. Airbnb competing with the mainstream hotel industry has experienced a devasting impact in their bookings as well. IPX 1031 reports that 64 % of guests cancelled their bookings. Airbnb expects a 44% loss in revenue from June thru August. About 70% of guests say they are fearful about the safety of staying at host location.  Bookings are beginning to pick up as reopening of the economy begins with 26% of guests say they will rebook for this summer.  However, hosts face a financial challenge as 16% have already delayed a mortgage payment and 50% expect to be out of business if the pandemic lasts for 6 months or longer.

Small Business, The Survival of Millions of Small Businesses Is Threatened

Creative Services

The gig economy is huge segment of our workforce. In 2019, 33% of the labor force or 55M contract workers were in the labor force, according to McKinsey & Company. Since the pandemic hit the U.S., thousands of gig economy workers were laid off as they are often the first to be let go in any recession. Creative services is a major segment of the gig economy.  The highly skilled creative services workforce includes: writers, actors, producers, directors, studio crews, artists, video and audio professionals. Los Angeles has the second largest creative services workforce second to New York.  The Los Angeles economy has been hard hit by the mid-March shutdown with an unemployment rate of 21%.  The heart of the local economy is in entertainment production. Media production is a project based business using ad hoc teams. Thus, when production was shutdown contractors were laid off without major company benefits like health insurance, retirement matching funds or stock options. The creative services industry while concentrated in New York and Los Angeles employs thousands of workers across the U.S.

Small Business, The Survival of Millions of Small Businesses Is Threatened

Source: The Wall Street Journal, 6/30/20

Other skilled independent service workers include technical workers like software developers and IT staff, and professional services which include attorneys, marketing support staff, and management consultants.  As the entertainment industry shutdown it depended on technical services workers to quickly shift production to Zoom shows and at home programs. This production shift provided a bridge during the shelter-in-place situation while providing program content for advertising.  California has announced a partial reopening of the economy. However, there are many issues in shifting to in studio production. New virus control regulations call for six foot social distancing, masks and disinfecting that are difficult to implement in an indoor studio team environment.   New Zealand with a good virus containment record is already taking advantage of the Los Angeles film industry predicament by offering incentives to move production activity to their studios. In Europe, the UK and Germany are also promoting their contained virus facilities for media development. In addition, Los Angeles is likely to have a slow recovery due to increasing virus infections in the Southern California area. Due to increasing infections creatives services workers enrolled in the Pandemic Unemployment Assistance program are likely to need continued benefit payments.

The Outlook for Small Businesses

This is a small business Great Depression

Nicholas Colas, Co-Founder, DataTrek Research

The small businesses sector is the jobs engine of the U.S. economy. In 2019 small businesses created 1.5M jobs for 64% of total business new hires. Plus, small businesses provided 50% of all economic output and 60M jobs accounting for 47% of the total labor force (chart below). Many businesses are just hanging on as only 40 % of small businesses under 500 employees are profitable.  The other 60% are either breaking even or losing money.  Most small businesses have only 30 days of free cash flow.

Small Business, The Survival of Millions of Small Businesses Is Threatened

Sources: The U.S Census, Heather Long, Washington Post – 6/5/20

Prior to the pandemic, small businesses have been directly targeted by big businesses which caused business closures and a forced reduction in workers noted in the chart above.  For example, in the Dallas metro area Walmart has located ‘neighborhood’ grocery stores in locations next to locally owned food stores triggering the closing of many locally operated grocery stores. Amazon purchased Whole Foods, providing financial and marketing power to take market share from local organic food businesses that had established separate niche market positions from Safeway and Albertson’s.  As the pandemic has forced consumers to stay home, major players like Amazon and Walmart have cranked up their curbside pick-up and home food delivery services. Thus, further eroding market share of local groceries that have not been able to offer online delivery services.

In the retail sector, Amazon has built a huge e-commerce online business which has continued to whittle away at market share of small retail businesses.  Small businesses try to differentiate their business by offering sales, support and expertise not available on the internet.  For example, a California sewing machine and fabric retailer, experienced a 90% decline in fabric sales from the lockdown. Yet, just one day after the lockdown they had 45 people come in for sewing machine repairs. As people were sheltering-in-place there was renewed interest in sewing. Small businesses that are innovative, adaptive, and have sufficient funding will likely be the businesses that survive this recession.

Small Business, The Survival of Millions of Small Businesses Is Threatened

As the pandemic hit, lockdowns were instituted in both rich and poor neighborhoods triggering reduced consumer spending.  However, a Harvard study showed that consumers in affluent ZIP codes cut their spending by 70% while spending in lower income ZIP codes saw only a 30% dip.  Of major concern, even after states opened their economies for business spending in the affluent neighborhoods did not return to pre-pandemic baseline spending levels.  The decline in affluent area spending forced small businesses in those ZIP codes to lay off 65% of their workers, versus businesses in low income areas which laid off 30% of their staff.  The affluent consumers had higher discretionary income so when they stopped spending there was a greater spending decline.  Small businesses catering to these affluent consumers had strong businesses but when discretionary purchases stopped their business income dropped significantly. In lower income neighborhoods small businesses were providing more essential goods and services so workers continued to buy.  Also, some affluent consumers left core city neighborhoods. Nicholas Colas, cofounder, DataTrek Research has observed a drop in income for small businesses near his Midtown Manhattan home. He notes, “(my) neighbors have fled to their second homes or rented homes. The small businesses that depend on their physical presence in the city have seen business dry up.” The implication is that virus safety concerns of high income consumers were more of a critical factor in local spending than states opening their economies.

The impact of the economic decline has hit minority owned small businesses harder than white owned firms.

Small Business, The Survival of Millions of Small Businesses Is Threatened

Source: Bloomberg – 6/8/20

By April, there was a 41% decline in black owned businesses or nearly three times the loss of white owned businesses.  Lockdowns forced many minority businesses to close in already low income neighborhoods forcing increased unemployment while threatening their limited financial security.

In addition, the small business sector faces a major headwind in new business creation. The following chart from the Kauffman Foundation shows the predicted trend for new business applications which include forecasts for hiring or wages planned.  There is a 37 % decline in the April – May timeframe from the predicted number of applications likely to be filed compared to 2019.  Small businesses are a major job creation segment of our economy so the decline of the creation of new businesses is a concern.

Small Business, The Survival of Millions of Small Businesses Is Threatened

Source: The Kauffman Foundation – 5/2020

We expect four waves of economic activity that fit within a standard U-shaped recession model consisting of contraction, trough and recovery phases. Today, we are in the early stages of the contraction phase of the overall economic cycle. (Please see our post, COVID-19 Triggers Transformation Into A New Economy – Part 1 on a U-Shaped economic cycle and indicators to watch).   The first and second waves outlined below complete the contraction phase. Wave three is a trough phase of low economic activity. Finally, wave four emerges in the recovery phase where ‘green shoots’ begin to appear as business models that are working turn profitable and begin to take hold across the economy.

Wave 1 – Shock – Today, there is financial relief for some small businesses from the Payroll Protection Program (PPP), $1200 checks to consumers, Fed bond buying, Fed Main Street Loan Program which has been slow getting started,  48% of small businesses report not making their full June rent payment, and retail foot traffic is slowly returning.  But, retail sales are still 16% below pre-pandemic levels (chart below):

Small Business, The Survival of Millions of Small Businesses Is Threatened

Sources: Google, Macrobond, ANZ Research, The Wall Street Journal, The Daily Shot – 6/23/20

Small Business, The Survival of Millions of Small Businesses Is Threatened

COVID-19 infections are rising in 23 states which account for 25% to 33% of national GDP. Goldman Sachs rates the R0 (or rate of one person infecting another) factor at 1.1 nationally or doubling of infections every 59 days. The rise in infections will likely cause a significant economic disruption. A high vulnerable group, Baby Boomers account for 30% to 35% of consumer spending. They are likely to be concerned about their safety. Thus, they will be reluctant to leave home causing reduced consumer spending, according to Deutsche Bank.

  • The weakest small businesses are not financially viable  – 100k – 250k small businesses close (Harvard Business School Study, May 2020)

Wave 2 – Relief Runs Out– In the near term future, due to lack of bipartisanship in Congress, PPP relief funding is renewed for only five weeks, relief checks will stop to consumers, there will be limited major company hiring due to lack of demand, some creative small businesses will adapt, others do not, but demand is capped by 25% permanent layoffs by small businesses by January, 2021.

  • COVID -19 second wave will hit many states causing significant economic disruption, – 2M – 3M small businesses close

Wave 3 – Economic Feedback Loop Sets In –  In the intermediate future, permanent layoffs will continue, many more mortgages will go into default, consumer confidence will continue to decline based on fear of layoffs even for those with jobs. A COVID-19 vaccine, or Herd Immunity will take hold, for those consumers with money and jobs spending will begin to rise yet below pre-pandemic levels due to uncertainty.

  • So many workers will be jobless that the economy is stuck at a depressed level. 3M – 4M small businesses close

To mitigate a deep economic Wave 3, we look for state and local governments, private equity firms and corporations to invest in the economy. The federal government must implement a national strategic program of testing, tracing and treatment to control the COVID-19 virus.  Only when consumers feel comfortable resuming their pre-pandemic activities will the economy be able to build on a solid economic foundation necessary for recovery. Wave 3 will last longer and have a tighter grip unless significant government investments are made in infrastructure, job training for new types of work to match labor better to job openings, and climate change solution job opportunities.

Wave 4 – Recovery Begins – innovative small businesses with solid business models and good cash flow begin to grow from increased consumer spending.  The federal government begins to focus on investment initiatives like infrastructure spending.  Longer term focused business development programs finally take hold as suggested in Wave 3 above on how to mitigate a deeper Wave 3 trough.

  • Renewing economic activities will begin to take hold – 400k -500K new small businesses open

Federal Relief Programs Fall Short

Many small business owners fault the federal funding programs for not being flexible enough to pay for services, product maintenance, insurance, vendors and other essential needs that are not payroll related. Let’s look at where the federal programs worked to provide relief to small businesses and where they did not meet the financial needs of small business owners.

In early April, Phase One of the PPP was quickly funded by Congress. The CARES Act in implementing the PPP focused on providing funding to small businesses who would keep employees on staff.  Thus, a key provision to receive funds was companies had to use 75% of the funds for payroll and only 25% for other expenses if the loan was to be forgiven at the end of the June 30th period.  Subsequently, Congress a few weeks ago passed a set of changes to the PPP law which extend the payroll funding time frame from 8 weeks to 24 weeks, hiring for the forgivable loan to December 31, 2020, and unforgiven part of the loan time frame for payback was extended from 2 years to 5 years. The funds available for payroll was lowered to 60% with 40% to other essential costs like rent and utilities. Many small businesses did not have an opportunity to receive Phase One funds as the money went to existing large bank customers and many major corporations. A major benefit of the PPP program was conversion of the loan to a grant if funds were used primarily for keeping employees on payroll. Congress passed a second law providing an additional $484 billion for PPP funding. Banks began taking applications on April 30th, focusing their loan underwriting activity on those small businesses left out of the Phase One. 

The National Federation of Independent Businesses (NFIB) reports that 77% of its members have applied for PPP loans and 93 % of those have been approved. Thus, it is estimated that 22M small businesses have temporary funding to survive for the next 6 months. Yet, most small businesses are still in tight financial situation. Many small businesses that received funds in the first round spent the funds to keep employees off unemployment but their business has not reopened.  Now, business owners face consumers not coming back due to the virus infections increasing thereby running out of funds to survive until customers return. For example, the accommodation and food services sector was hit from March through May with 33 % of the job losses in the U.S. but only received 8% of PPP loans. There are 9M total businesses without grants or loans from the federal government who must turn to other financial sources.  Owners will need to tap their own savings, retirement, angel investors or family and friends to keep operating.

Congress authorized $600B for a new Federal Reserve Main Street loan program for businesses who were not interested in the PPP program or could not qualify.  The name of the program is a bit of a misnomer as corporations up to 15,000 employees and up to $5B in sales are eligible. The program was to start in early May, yet only two weeks ago did banks start to take applications. Interest from banks and businesses has been tepid due to certain provisions which are not attractive to borrowers. Provisions such as large loan sizes beginning at $500k to $10M and begin payments at 1 year.  Small businesses need loans ranging from $100k to $250k. Major banks are not interested in the program as well.  At first the Fed required banks to take 15% of the loan collateral with the Fed providing 85%.  The Fed since has changed loan provisions to offer loans starting at $250k, and extending the time frame out to 2 years to begin paying principal and interest only beginning after the 1st year.  Banks would only have to take 5% of the loan on their books, with the Fed taking 95% of the loan value on its books.  Business have found the paper work to be too complicated, and major banks are not interested in actively marketing the program. The Main Street initiative was well intended but falls short and comes too late to meet the needs of business owners already short on cash. It seems in retrospect that involving community banks that are closest to small businesses in the development of a fast track focused loan program on the unique needs of small businesses would have been more effective.

The result of these federal programs time limits and relief orientation is that they don’t begin to take on the huge small business development challenge for the real possibility that 30 – 40 % of the non PPP relief businesses or 3M will face insolvency by January 2021.

The PPP and other relief programs will likely need to be extended beyond the five weeks now anticipated by Congress. However, what is really needed is a long term solution to small business development.  In our post, COVID-19 Triggers Transformation Into A New Economy – Part 2, we propose the idea of building a self-renewing economic ecosystem of venture capitalists, angel investors, company incubators, universities and local government to build small businesses. Areas that have successfully used the self-renewing economic model include:  Portland, Oregon with their Silicon Forest, and Salt Lake City has their Silicon Slope.

We need an imaginative vision for America that includes workers at all income levels and makes labor’s role in the economy a partnership with capital.  We will pull out of the recession faster with a longer expansion if we build an economy that works for all.

Small Business, The Survival of Millions of Small Businesses Is Threatened

Investment Opportunities

Now is a good time for investors to review their investments and consider new investments while rebalancing portfolios.  Rebalancing portfolios based on considering both return and the financial needs of small businesses is crucial to our economy and communities. Outlined below are a set of investments to review. Investors will want to conduct more in depth research to assess how these types of investments will meet their portfolio objectives.

Community Banks

Local banks provide the cash life blood of many small businesses.  Most small businesses do not have accounts at major banks but instead rely on their local banker for loans and credit accounts.  Moving funds from a big five bank to a local bank will provide more financial support for local businesses. On a national level investors can invest in indexes that focus on community and small banks in the U.S., for example: KBWB

Non-Bank PPP Providers

These companies serve millions of small business owners, many of whom are sole proprietorships and mom and pop stores. They have the AI and advanced technology to process these loans, as well as strong relationships with many borrowers who regularly use their concierge-type services. Plus, they are certified PPP loan providers to small businesses that use their services.  Examples of Non-bank PPP providers are Intuit, Square and PayPal

Community Development Financial Institutions – CDFIs

CDFIs are mission-driven financial institutions that have been certified by the U.S. Department of the Treasury. CDFIs include credit unions, banks, loan funds, and venture capital funds that operate with a primary mission of serving small businesses and low-income communities. Over the past 35 years, CDFIs have made $74B in loans to support over 400,000 small businesses with about 58% going to minority owners. The Treasury Department has funded the CDFI program for $250M this year, seeding additional investments by foundations, investors and banks.  Many small businesses were successful obtaining PPP loans with their local CDFI. There are 1120 certified financial institutions participating which includes 300 credit unions.  CDFIs offer not just capital to small businesses but provide coaching on how to write business plans, write a loan proposal to a bank or learn how to tighten accounting practices. Mark Ivancie, Director of Growth and Partnership for CNote, a software platform provider for CDFI investing, observes that investors “can gain a competitive return, support small businesses and have a social impact.”  Some CDFI investments offer returns from 2.25% to 4.00% depending on the term. 

Investors can allocate funds to CDFIs in two ways, directly and indirectly.  One example of a way to directly invest is with the Reinvestment Fund.  The fund has $1.5B in assets under management and focuses on small businesses, housing projects, access to health care, educational programs, and job initiatives.  Indirectly, funds can be placed via an innovative software platform like CNote to a nationally diverse set of CDFIs. CNote qualifies, monitors and manages all the details of investing in CDFIs. Both the Reinvestment Fund and CNote have taken steps to insure investors receive repayment of both principal and interest based on CDFI agreements, loan loss reserves and quality audits.

For a directory of local CDFIs in your community there is a Treasury site to download a spreadsheet, and then click on the city and state tabs to find a CDFI near you.


A wider perspective on ‘investment’ may include patronage.  It would be helpful to pause and think of all the locally owned businesses we patronize. We suggest getting to know the owner, maybe there is a loan or some financial assistance that you can provide.  As a customer you know the quality of their product or service so you can assess the likelihood of the risk in your investment.  We often take local boutiques for granted as we drive by to buy a gift at Target for a birthday. Worse yet we just buy the birthday gift online from Amazon. At the least make sure you continue to go to their store for a curbside pickup of your purchase.  We depend on local services like barbershops, nail salons, laundries and many more that provide essential services. Consider making an advance payment on an upcoming service appointment to help the owner make ends meet until reopening.

Increasingly, younger generations are concerned with what types of businesses they spend their money. Barbara Kahn, professor of marketing at Wharton has observed a shift in purchase patterns of young shoppers. “We see Gen Z and the young people put their money where their mouths is. Now people think of the entire transaction of what they’re paying for. That there’s value in sustainable transactions, in supporting the local community, that’s over and above the value of the goods.”


Small businesses in our neighborhoods create a unique and rich culture for our communities or where we visit.  What would a New England seaport town be without local clam chowder or lobster roll?  Or New Orleans be without a Cajun blackened shrimp?  Or Southern California be without a Balboa Bar of a scoop of ice cream coated with chocolate and toppings on a stick. Beyond food we may like to shop for a local beach shirt, woven handbag, or table built of wood from indigenous trees.  All these things and experiences create a wonderful culture we enjoy, but many could be gone.

Community small businesses need our investment and patronage today more than ever. It is time to examine where we allocate our investments to make a difference in our community. In addition to impacting our health and economy, the virus is attacking the small business cultural fabric of our country. The survival of many small businesses is threatened. We have an opportunity to support their products and services to ensure they are open to provide jobs and enrich our communities.  

Patrick Hill is the Editor of The Progressive Ensign, writes from the heart of Silicon Valley, leveraging 20 years of experience as an executive at firms like HP, Genentech, Verigy, Informatica, and Okta to provide investment and economic insights. Twitter: @PatrickHill1677

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